Spread: 10 year vs. 2 year

Spread between the 10 year vs. 2 year US treasury yield. Relationship demonstrates where short term yields are higher than long term yields.

Last extreme was in March 2000….which of course saw a correction from the Tech led rally. Now this relationship stood out as a gauge for a pending market correction. I am speculating that we are nearing correction levels into Q1 2007 – and looking to short housing related themes and cycle winners in the past 6 years. Specfically, examining overvalued rate-sensitive themes. Not a simple sector call but even more rewarding on a stock specific basis.

Tops usually occur unexpectedly but always worth seeking early signals.

If bullish sentiment begins to grow following a solid start in Q1 2007, I plan to trim longs, and select shorts to consider. We are nearing that point and looking for shorts in Rate sensitive themes. (Excluding diversified large cap banks).

Again, most previous ideas support this thesis and layout the idea selection process.

2007 thoughts early draft:

In laying out my game plan for 2007, plenty of issues to consider, ideas to revisit, mistakes to learn from and finally being thankful.

Markets are what you make them but always have the last word. Virtually, it’s a place to test thoughts, bias or just a bet.

Regardless, I find it appealing for many reasons but that’s a happy hour discussion and not necessarily a bog material.

If each trader/investor had to pick 5 stocks for 2007 – what would they base it on? Where do managers press the bets or add the heaviest weight to the idea generation part of the game. Trading makes brokers rich and might make you lose your sanity. Therefore my goal in 2007 is to stick with ideas but spend time managing the trade. Okay 12 months seems long but can break it into two. Despite, Bill Miller ending his streak this year (baring a miracle) I will come back to the basics of value investing.

My intuition / observation.

Following July’s market recovery, most areas in the market have been bid up and remain a growth story. Paying up for growth might have its merits but

Looking ahead there are plenty of material to move markets. I like the media, technology and telecommunication sectors as an area of investment.

Healthcare selectively can produce returns given a solid and sustainable story. And stock specific Safeway (SWY) – stand out as other candidates to become growth and talked about stories.